CAPITAL ADEQUACY Meaning and
Definition
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Capital adequacy refers to the measure of the financial strength and stability of a financial institution, such as a bank or a credit union, to meet its financial obligations and absorb potential losses. It measures the extent to which a firm's capital, primarily comprised of equity and reserves, is sufficient to support its risk exposure and protect against the risks it faces.
In simpler terms, it assesses whether a financial institution has enough capital relative to its risk profile. Capital adequacy is crucial for maintaining the stability and solvency of financial institutions, as inadequate capital can lead to severe financial distress and even bankruptcy.
The capital adequacy ratio is a widely used metric to determine the soundness of a financial institution. It compares a firm's capital, including capital reserves and retained earnings, with its risk-weighted assets, which reflect the potential risk associated with different types of assets. This ratio is often subject to regulatory standards set by financial authorities to ensure the stability of the financial system and protect depositors and investors.
Financial institutions with higher capital adequacy ratios are considered more robust, as they have more financial resources to absorb potential losses and ensure the safety of depositors' funds. On the other hand, institutions with lower capital adequacy ratios are vulnerable to financial shocks and may pose a higher level of risk to the overall economy.
Common Misspellings for CAPITAL ADEQUACY
- xapital adequacy
- vapital adequacy
- fapital adequacy
- dapital adequacy
- czpital adequacy
- cspital adequacy
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- cqpital adequacy
- caoital adequacy
- calital adequacy
- ca0ital adequacy
- caputal adequacy
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- capotal adequacy
- cap9tal adequacy
- cap8tal adequacy
- capiral adequacy
- capifal adequacy
- capigal adequacy
Etymology of CAPITAL ADEQUACY
The word "capital adequacy" consists of two main terms: "capital" and "adequacy".
The term "capital" comes from the Latin word "capitālis", which means "of the head or chief". It was originally used to refer to the head or top part of something. Over time, it evolved to signify the principal sum of money or assets invested in a business or enterprise.
The term "adequacy" comes from the Latin word "adequātus", which means "equal" or "sufficient". It refers to the state of being enough or suitable for a particular purpose.
When combined, "capital adequacy" refers to the sufficiency or adequateness of a bank's capital in relation to its risk exposure. It is a measure used to determine a financial institution's capacity to absorb potential losses without jeopardizing its financial stability.
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